Japanese equities surged, leading a regional recovery from Monday’s global market rout, which saw billions wiped off valuations from New York to London. Both of Japan’s major stock indices rebounded sharply, gaining nearly 11% after a previous decline of over 12%, while South Korea’s Kospi Index increased by more than 3%. This rally helped halt a three-day decline in regional markets, suggesting that traders are recalibrating after a dramatic selloff of risk assets.
Tomo Kinoshita, a global market strategist at Invesco Asset Management in Tokyo, noted, “As Japanese equities rebound, the rest of the Asian markets are likely to follow suit. The magnitude of Japan’s stock price drop yesterday was significantly larger than that of Europe and the US, and market participants are recognizing that Japan’s market correction was excessive.”
The global equities selloff, driven by concerns over a potential US recession, a retreat from artificial intelligence investments, and a rising yen impacting carry trades, had led to a sharp decline in stock prices worldwide. Despite the rebound, Wall Street’s volatility index, the VIX, remains elevated, indicating ongoing uncertainty and potential challenges for risk assets. The VIX saw a record increase on Monday, reflecting heightened market fears.
On Tuesday, the yen fell as much as 1.5% before recovering some of its losses. The currency has gained approximately 11% this quarter due to expectations of further rate hikes by the Bank of Japan. Japan’s Nikkei 225 futures hit a circuit breaker before market opening, while South Korean Kospi 200 and Kosdaq 150 futures triggered a temporary halt in buy orders due to increased volatility.
Rupal Agarwal, an Asia quantitative strategist at Sanford C. Bernstein, commented, “The market reaction was quite extreme yesterday, leading to today’s sharp rebound. However, I anticipate continued volatility and suggest focusing on late-cycle defensive investments, such as quality and dividend-yielding stocks.”
The recent market turmoil in Japan was exacerbated by forced margin selling, with retail investors’ margin positions reaching an 18-year high by late July. As stock prices fell, investors who had purchased stocks on credit faced pressure to liquidate their positions, contributing to the market’s decline.
Japan’s key stock indexes entered a bear market on Monday. In response, officials from Japan’s Ministry of Finance, the Bank of Japan, and the Financial Services Agency are scheduled to hold a meeting to discuss international market conditions.
The auction of 10-year Japanese government bonds on Tuesday received the weakest demand since 2003, reflecting investor concerns about potential rate hikes. The secondary market for these bonds saw significant selling during the broader market selloff.
In Asia, Treasury yields rose, with the 10-year US yield climbing five basis points to 3.84%. The yield had previously dropped to 3.67% on Monday before rebounding due to stronger-than-expected US economic data. Matt Simpson, a senior market strategist at City Index Inc., observed, “The stronger-than-expected ISM services report helped stabilize Wall Street, leading to a healthy correction after the prior selloff, rather than a full risk-on rally.”
In the wake of the global equities selloff, chip giant Taiwan Semiconductor Manufacturing Co. saw a rebound after being highlighted as a “top pick” by Morgan Stanley. The company’s shares had experienced a historic drop, contributing to Taiwan’s main stock gauge marking its worst performance in 57 years.
The S&P 500 Index fell by 3% on Monday, its largest single-day drop since September 2022, while the Cboe Volatility Index (VIX) spiked to 38.57, significantly above the Nasdaq 100’s VXN measure. Futures for the S&P 500 and Nasdaq 100 improved during Asian trading hours.
Federal Reserve Bank of San Francisco President Mary Daly indicated that the US labor market is softening and suggested the central bank might consider rate cuts in the coming quarters, though she did not confirm a significant weakening of the labor market.
Market expectations now include a nearly 50-basis-point Fed rate cut in September. Additionally, forecasts for lower policy rates in the coming months have increased in Korea, Thailand, and Malaysia.
In other financial news, Australia’s central bank held its cash rate at 4.35% for the sixth consecutive meeting. The Australian dollar remained steady, and yields on three-year policy-sensitive bonds were unchanged.
Oil prices increased from a seven-month low as disruptions in Libyan production shifted focus to the Middle East. Bitcoin briefly surpassed $56,000 after significant losses in major cryptocurrencies during the global market downturn.
Upcoming Key Events:
1.Australia rate decision (Tuesday)
2.Eurozone retail sales (Tuesday)
3.China trade and forex reserves (Wednesday)
4.US consumer credit (Wednesday)
5.Germany industrial production (Thursday)
6.US initial jobless claims (Thursday)
7.Fed’s Thomas Barkin speaks (Thursday)
8.China PPI and CPI (Friday)
Market Movements:
Stocks:
1.S&P 500 futures rose 1.4%
2.Japan’s Topix rose 8%
3.Australia’s S&P/ASX 200 rose 0.2%
4.Hong Kong’s Hang Seng rose 0.5%
5.Shanghai Composite was little changed
Currencies:
1.Bloomberg Dollar Spot Index was little changed
2.Euro at $1.0952
3.Japanese yen fell 0.8% to 145.33 per dollar
4.Offshore yuan was little changed at 7.1405 per dollar
Cryptocurrencies:
1.Bitcoin rose 1.8% to $55,395.78
2.Ether rose 2.2% to $2,490.44
Bonds:
1.10-year Treasuries yield rose six basis points to 3.85%
2.Japan’s 10-year yield rose 18 basis points to 0.925%
3.Australia’s 10-year yield declined five basis points to 4.01%
Commodities:
1.West Texas Intermediate crude rose 1.6% to $74.14 a barrel
2.Spot gold was little changed
Related topic:
Trading Futures Vs Stocks: What Is The Difference?
